
How Africa’s Financial Sector Can Lead Effective Climate Action
In a few short years, climate action has moved from a “nice-to-have” into an existential emergency. By greening its offerings and other conscious action, Africa’s financial sector has a crucial role to play in driving effective climate action to preserve mother earth as we reap economic benefits. How? Several ways:
Mobilizing capital and channelling investments: Climate conscious financial institutions channel their lending and other investments towards climate-friendly projects like renewable energy, sustainable/ climate-smart agriculture, green building projects and other low carbon/ energy efficient ventures. Financial institutions can step this up by “greening” all their operations. More about this in our subsequent articles.
Risk management: De-risking climate investments can produce notable results. Climate smart projects can be perceived as risky. Financial institutions can develop innovative financial products that mitigate these risks and make green investments more attractive. At FRIENDS Consult, we are already working with financial institutions to develop such products or to green existing ones.
Regulation and incentives: Financial regulators like Central Banks have already started issuing guidelines for climate-conscious finance. These could be upgraded into mandatory regulatory requirements on fundamental climate-related aspects. Authorities that have not yet started work in this regard ought to. Furthermore, regulatory incentives could be introduced for financial institutions that excel in preserving or enhancing the environment through their operations.
Greening the financial system: National financial sector strategies have a big role to play here, as do regulatory bodies and wholesale lenders to financial institutions. National strategies can deliberately tilt the financial sector towards more climate responsibility through policy frameworks and guidelines that support climate finance. Raising the risks for environmental non-compliance while creating opportunities for climate-friendly financing can yield good results. Climate risks and opportunities could then be assessed through normal stress tests that factor in climate scenarios.
Incentivizing green projects: Financial institutions can offer loans with lower interest rates or other benefits for businesses and individuals pursuing sustainable practices.
Carbon markets trade and green bonds: Africa has vast potential for carbon offset projects. Financial institutions can facilitate viable trading in carbon credits, which can provide funding for conservation and clean energy initiatives. Issuing green bonds, specifically for financing climate-friendly projects, can attract a new pool of investors interested in sustainability.
There are some good initiatives underway, and more of these should be encouraged. The African Financial Alliance on Climate Change (AFAC) works to mobilize finance for climate solutions. The Johannesburg Stock Exchange launched a voluntary carbon market to facilitate carbon offset trading. In East and West Africa, efforts are underway to introduce environmental guidelines or regulations for the financial sector.
By harnessing its financial muscle and fostering innovation, Africa’s financial sector can be a powerful engine for a sustainable and climate-resilient future.
Dr. Keren Obara.
Digital Marketing Associate.